Stocks Pulled and Pushed as Spain’s Fate Changes Hourly

The market got itself into rally mode this morning on the assumption that Spain was basically going to get a EUR30 billion no-strings-attached bailout for its ailing banks, part of a larger EUR100 billion bailout fund.

Not only are the strings still up for debate, but the German court is holding up the entire ball of yarn. Once again, we’re seeing a deal isn’t a deal in Europe until the money’s deposited.

The Dow, which had risen as much as 97 points, slipped into the red and is now marginally higher, taking its cues from the euro, which has dropped about 0.6% to $1.2242. European stocks are generally higher, but that’s not translating over here. The Nassdaq Comp is down 0.4%, and the S&P 500 is down 0.1% at 1349.

Most sectors are down, with tech and energy posting the widest losses. Staples, telecom, and utilities are rising. On the Dow, IBM, Intel, Merck, and Alcoa are leading the index lower (on a dollar basis). DuPont, United Tech, and Wal-Mart are leading the gainers.

Spain’s critical 10-year bond yield dropped sharply this morning, after reports broke out that Spain had secured a EUR30 billion advance on its bank bailout funds and more time to work off its budget deficit. Critically, the issue of whether Spain or the European Stability Mechanism (ESM) would have to backstop the funds seemed to be settled in favor of Spain, in that it would not have to guarantee the funds.

This has been a key issue. More debt will only drive Spain into a sovereign bailout that much faster. But as our Gabriele Steinhauser and Matina Stevis reported this morning, the issue is definitely not settled. Germany’s finance minister, Wolfgang Schauble, is insisting that even after the ESM approves bank bailouts, the host country (Spain in this case) must guarantee any losses.

Then there’s the issue of the constitutionality of the ESM within Germany itself. The nation’s Constitutional Court is hearing a challenge to the ESM, and its ruling will likely determine whether the fund gets set up at all. The court is expected to make a ruling this month, but there’s chatter (here’s a SpiegelOnline article translated online) the ruling could take up to three months, and the proceedings are already feisty.

Any delay just pushes back the date when the ESM could finally start disbursing funds. Of course, before that happens, the Continent-wide banking regulator must be set up. And the issue of loss guarantees must be settled. And the issue of subordination must be settled, which this headline from Reuters suggests is still very much a live issue:

Comments (1 of 1)

At least our markets showed more resposibility this morning, erasing early gains and going into a small loss (it's now noon). European markets chose to remain delusional, which will mean a bigger eventual drop.

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